FSA fines stockbrokers for poor data security

Multiple failures put customers at risk

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A firm of stockbrokers has been fined for failing to adequately protect its customers from the risk of identity fraud. The Financial Services Authority (FSA) said its mistakes included failing to manage the risks introduced by staff using instant messaging and web-based email.

Merchant Securities Group Limited also failed to verify the identities of customers that contacted the firm by telephone. Instead, the firm relied on being able to recognise customers' voices and talking with them informally about personal matters such as holidays or hobbies. Personal account numbers which could be used with a customer's name to access account information were included in routine letters.

The FSA also found that back-up tapes containing unencrypted customer information were stored overnight in a bag at the home of a member of staff.

The London-based firm also failed to implement adequate controls "to mitigate the risk of customers' personal data being transmitted outside the firm by failing to prevent the use of instant messaging and web-based email," according to the penalty notice (pdf) served by the FSA.

A spokeswoman told OUT-LAW that the FSA does not ban instant messaging and web-based emails in regulated firms. Its concern is focused on firms understanding and managing the risks.

"They [Merchant Securities] didn't show that they were aware of these tools being a risk or how they could manage that risk. There was no way to check what they had sent out or be able to retrieve it," she said.

"It's not about saying that firms mustn't use Instant Messaging and web-based email, it's about understanding the risks involved with those tools and how to manage those risks."

It is the first time the FSA has fined a stockbroking firm for weak data security controls. However, there was no evidence during the FSA's investigation that customer details had been lost or stolen.

Margaret Cole, Director of Enforcement at the FSA, said: "It is unacceptable that despite increased awareness of data security issues, a firm should be so careless about its systems for protecting customers' personal details. People have a right to expect their details to be kept secure and firms should be committed to treating their customers fairly in all aspects of their business."

Merchant Securities' failings came to light in September 2007, during a visit by the FSA, rather than through their own systems and controls. Merchant Securities co-operated fully with the FSA and agreed to settle at an early stage of the FSA's investigation. It qualified for a 30 per cent discount under the FSA's executive settlement procedure. Without the discount, the fine would have been £110,000.

In the last three years, the FSA has fined Norwich Union £1.26 million, BNPP Private Bank £350,000, Nationwide £980,000 and Capita Financial Administrators £300,000 for failings relating to information security lapses and fraud.